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Banking Union and Governance of Individual Clients/Actors Relationships | The Banking Union and the Creation of Duties

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Conference: The Banking Union and the Creation of Duties - Department of Law, Robert Schuman Centre for Advanced Studies, European University Institute

By: Tobias Tröger, SAFE Chair of Private Law, Trade and Business Law, Jurisprudence / Goethe University Frankfurt

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Banking Union and Governance of Individual Clients/Actors Relationships | The Banking Union and the Creation of Duties

  1. 1. Banking Union and Governance of Individual Clients/Actors Relationships The Banking Union and the Creation of Individual Duties EUI, March 19 & 20, 2015
  2. 2. Motivation Goal of macro-prudential policy (supervision) narrow: systemic stability of banks broad: stable economy and financial system through the cycle Target is to influence specific conditions for lenders/borrowers (not general financial conditions for real economy) Indirectly, yet intendedly affects banks’ services via-à-vis clients Public governance of bank-client relationship that influences resource allocation in decentralized decisions (contracting) determines framework parameters of specific transactions seeks to promote common good (prima vista heteronomous) In its mode of operation akin to monetary policy (also linked in objectives) 3/17/2015 1
  3. 3. Transmission of monetary and macro-prudential policies 3/17/2015 2 Risk free interest rate (price of leverage) Macro- prudential policy Financial stability balance sheet (portfolio choice, buffers) Financial sector (subset, individual institution) Monetary policy Price stability Non-financial sector Macro-prudential tool (price and quantity of risk) Expectations (inter-temporal allocation) Mutual re-enforcement
  4. 4. The importance of macro-pru in times of QE QE (ECB‘s PSPP) is supposed to work through portfolio rebalancing increased liquidity raises asset prices of other FI has welfare effects boosts demand (and thus achieves price stability) but also breads potential for bubble and crash (financial instability) (unconventional) monetary policy measure requires macro- prudential policy counterweight Note: if QE operates instead only via exchange-rate as a beggar-thy-neighbor policy macro-prudential counterbalance is of less immediate importance 3/17/2015 3
  5. 5. Real estate mortgage markets as a particular example Excessive credit-growth, unsustainable developments in real estate markets and built-up of leverage in private sector, Reinhart & Rogoff (2009), Borio & Drehmann (2009) 3/17/2015 4 Schularick et al., 2014
  6. 6. Macro-prudential tools targeting excessive credit growth 3/17/2015 5 (macro-prudential) instrument legal basis objective CCB CRD IV arts. 130, 135-140 Enhance banks‘ loss absorption capacity (higher resilience) and increase funding costs to slow down credit growth/moderate financial cycle (lower vulnerability) Sectoral requirements for specific exposures (e.g. increased risk weights, minimum LGD values) CRR arts. 124, 164, pillar 2 (SREP), CRR 458 SRB CRD arts. 133, 134 Own funds, capital conservation buffer requirements pillar 2 (SREP), CRR art. 458 LTV cap LTI/DSTI cap National law direct restriction of lending to decrease banks‘ LGD and borrower‘s PD Leverage ratio National law Limit banks‘ leverage (failsafe for risk-based capital buffers)
  7. 7. Cooling-down overheated real-estate markets Capital buffers not very effective in highly collateralized markets CCB (≤ 2,5% CET1), SRB (≤ 5% CET1), national macro flexibility (≤ 2% CET1) can reach sizeable proportions extra capital has to be held against risk-weighted assets, i.e. highly collateralized real estate loan (risk weight of approx. 10%) Even if (common) buffer rates were maxed out, less than one percent of loan would have to be held in additional CET1 (0.095 x 0.10) Arguably caps (LTV, LTI, DSTI) and leverage ratio work better 3/17/2015 6
  8. 8. The role of the ESRB within the SSM ESRB is supranational macro-prudential authority (EU 28) also vis-à-vis ECB (Secretariat located at ECB, Regulation 1096/2010, arts. 2, 3) voluntary information flow from ECB to ESRB, ESRB Reg. art. 15(2); SSM Reg. art. 27(2) information request from ESRB to ECB, ESRB Reg. art. 15(5)-(7); SSM Reg. art. 3(1) ESRB recommendations and warnings directed to ECB (ESRB Reg. arts. 16(2), 1(3)(f): ECB as supervisory authority, cf. e.g. EBA Reg. art. 2(2)(f) as amended ESRB recommendations and warnings “enforced” through act or explain mechanism (ESRB Reg. art. 17) and public pressure (ESRB Reg. art. 18) 3/17/2015 7
  9. 9. The banking union angle ECB to top-up national macro-prudential measures, SSM-Reg. art. 5(2) can push through inconvenient policies (supra-nationalization was intended to reduce forbearance of NCAs, Tröger, 2014) has comprehensive view including interaction with monetary policy measures (Smets, 2014) NB: separation of monetary policy and supervisory function that allows for adequate flow of information is key ECB competence limited to (macro-prudential) instruments “in accordance with relevant Union law…subject to the procedures set out in the Regulation (EU) No 575/2013 and Directive 2013/36/EU in the cases specifically set out in relevant Union law” 3/17/2015 8
  10. 10. Macro-prudential supervision in the banking union 3/17/2015 9 ESRB bank client flow of information (voluntary and requested) ECB flow of information (voluntary and requested) recommendations and warnings recommendations and warnings top-up of CRD IV/CRR macro-prudential tool NCA CRD IV/CRR macro-prudential tool national law macro-prudential tool
  11. 11. Conclusion Macro-prudential instruments constitute tool of public governance of (newly established) bank-client relationships Do not allow to intervene directly in existing contracts Banking union establishes ECB to safeguard impartial and non- forbearing enforcement of supervisory framework also with regard to macro-prudential measures Objective seems somewhat insufficiently implemented when it comes to limit excessive credit growth in overheated real estate markets 3/17/2015 10

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